Servicing revenues up but originations see loss, company beats expectations

Walter Investment Management (WAC) beat analysts expectations in its second quarter but still posted a net loss for the second quarter of $12.9 million, which each includes pre-tax charges related to goodwill impairment in the Reverse Mortgage segment of $56.5 million.

Despite the loss in the quarter, Walter Investment is digging itself out of hole, and saw strong gains in servicing even as it saw a decline in originations.

“WAC reported 2Q15 GAAP EPS loss of ($1.01), but after adjusting for the goodwill write-down, the fair value mark on the MSR and legal reserves in reverse mortgage segment, we estimate the operating EPS was ($0.49) per share compared to our $0.19 estimate,” says Kevin Barker at Compass Point Research & Trading. “The GAAP EPS was also dramatically below our $1.81 estimate even if we were to back out the $1.50 per share goodwill impairment (non-taxed). WAC reported an ‘adjusted’ EPS of $0.65, which is the closest comp to the consensus number of $0.59 per share. TBV now stands at $10.65 from $9.91 in 1Q.

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"The miss compared to our estimates was primarily due higher MSR amortization expense and higher operating expenses,” Barker says in a client note.

The company reported a GAAP net loss for the second quarter of 2015 of ($38.1) million, or ($1.01) per diluted share, as compared to a GAAP net loss of ($12.9) million, or ($0.34) per diluted share, for the second quarter of 2014. The quarters ended June 30, 2015 and June 30, 2014 each include pre-tax charges related to goodwill impairment in the Reverse Mortgage segment of $56.5 million, or $1.50 per share, and $82.3 million, or $2.18 per share, respectively.

"We delivered strong operational results in our core segments as AEBITDA profitability in our Servicing business was in-line with our expectations, our Originations business capitalized on retention opportunities and demonstrated strong performance in the correspondent channel and our Reverse Mortgage business delivered positive AEBITDA and Adjusted Earnings,” said Mark O'Brien, Walter Investment's Chairman and CEO. “Our originations business funded $7.2 billion in UPB during the quarter, delivering strong margins from the retention channel and increasing production in the correspondent channel where overall volume growth combined with a shift to more GNMA production drove margin improvement.

“We have completed a comprehensive review of the Reverse Mortgage business and believe the steps implemented to drive process improvements will result in improved future profitability," he said.

Total revenues for the second quarter of 2015 of $412.4 million were relatively flat as compared to the same period of 2014. Net servicing revenues and fees increased $82.9 million as compared to the prior year quarter, primarily driven by an $84.7 million favorable change in the fair value of servicing rights resulting from the rising interest rate environment.

This increase was partially offset by a $25.2 million decline in net gains on sales of loans driven primarily by a shift in volume mix from the consumer lending channel to the lower margin correspondent lending channel, a $20.1 million unfavorable change in the net fair value of reverse loans and related HMBS obligations resulting from the rising interest rate environment and a decline in interest income on loans of $16.0 million related primarily to the sale of the residual interests in the Residual Trusts.

Total expenses for the second quarter of 2015 were 8% lower as compared to the second quarter of 2014, declining to $428.0 million, principally reflecting the Reverse Mortgage segment's current quarter goodwill impairment charge of $56.5 million, which was $25.7 million lower than the charge taken in the prior year period. As a result of these goodwill impairment charges, the Reverse Mortgage reporting unit no longer has goodwill. Results also reflect $6.0 million lower interest expense in the current quarter as compared to the second quarter of 2014 primarily due to the sale of the residual interests in the Residual Trusts.

"We continue to focus on the combination of our Green Tree and Ditech entities under the name 'Ditech, a Walter Company,' which we believe will leverage talent across these organizations and enhance the value of the brand by improving the customer experience, streamlining processes and enhancing retention efforts,” O’Brien said. “In conjunction with the combination of Green Tree and Ditech and our other cost savings initiatives, we have realized cost savings of approximately $24 million in the first half of 2015 as compared to the fourth quarter 2014 run-rate. We have also made significant progress on our planned WCO-related initiatives, including our contribution of Marix, a FNMA and FRE approved servicer to WCO. We have executed an initial sub-servicing agreement with Marix and assisted with the sourcing of new portfolio opportunities for WCO, including potential bulk MSR acquisitions."

The servicing segment generated total revenue of $274.2 million in the second quarter of 2015, a 35% increase as compared to second quarter 2014 revenue of $202.9 million. The change was primarily comprised of an $84.7 million favorable change in the fair value of servicing rights and a $12.3 million increase in other income reflecting strong performance on their acquired charged-off loans, partially offset by a $16.0 million decline in interest income resulting primarily from the sale of the residual interests in the Residual Trusts, $8.4 million lower insurance revenue due to the loss of commissions earned on GSE lender-placed policies beginning June 1, 2014 and a $5.7 million unfavorable change in fair value of their excess servicing spread liability.

Servicing revenues for the quarter ended June 30, 2015 included $175.3 million of servicing fees, $26.5 million of incentive and performance-based fees and $23.6 million of ancillary and other fees.

Expense for the servicing segment was $189.0 million, a decline of 16% as compared to the prior year quarter. The change was driven by a $25.7 million decrease in operational expenses resulting primarily from $13.2 million in accruals in the second quarter of 2014 for loss contingencies and legal expenses due to legal and regulatory matters outside of the normal course of business and $9.1 million lower salaries and benefits driven by fewer employees, as well as $9.9 million lower interest expense primarily as a result of the sale of the residual interests in the Residual Trusts.

The Servicing segment ended the quarter with approximately 2.2 million total accounts serviced with a UPB of approximately $243.2 billion. During the quarter, the Company experienced a net disappearance rate of 15.5%, an increase from the net disappearance rate in the prior year quarter of 13.8% as a result of increased levels of prepayments in the continued low interest rate environment.

The Originations segment generated revenue of $128.7 million in the second quarter, a decline of 14% as compared to the prior year quarter primarily due to a $29.0 million decline in net gains on sales of loans driven by a shift in volume from the higher margin retention channel to the lower margin correspondent channel, partially offset by $7.4 million higher other revenues primarily as a result of reinstating certain origination fees.

Expenses for the Originations segment of $95.7 million, which include $9.9 million of interest expense and $2.7 million of depreciation and amortization, remained relatively flat as compared to the prior year quarter, increasing only $3.8 million primarily driven by $3.3 million higher interest expense as a result of a higher volume of loan fundings partially offset by lower average cost of debt.

The Reverse Mortgage segment generated revenue of $20.2 million for the quarter, a 48% decline as compared to the prior year quarter reflecting lower net fair value gains on reverse loans and related HMBS obligations of $20.1 million, driven by unfavorable changes in non-cash fair value adjustments due to a higher LIBOR rate at June 30, 2015 as compared to prior periods. Current quarter revenues included a $6.8 million gain from the net impact of HECM loan and related HMBS obligation fair value adjustments, $11.9 million in net servicing revenue and fees and $1.4 million of other revenues. Total expenses for the second quarter of $111.1 million, which include a $56.5 million goodwill impairment charge, declined 11% as compared to the prior year period primarily driven by the prior year quarter's $82.3 million goodwill impairment charge.

The decline in the goodwill impairment charge was partially offset by $11.1 million adjustments in the current quarter associated with legal and regulatory matters and curtailment costs outside of the normal course of business and $4.6 million higher salaries and benefits expense resulting from increased headcount and higher incentives related to an improvement in funded volume.

The segment reported Adjusted Earnings of $2.5 million and AEBITDA of $3.7 million for the second quarter of 2015 as compared to Adjusted Loss of ($2.9) million and AEBITDA of ($1.7) million in the second quarter of 2014 due primarily to the growth in cash generated from origination, purchase and securitization of HECMs and net servicing revenue and fees partially offset by higher expenses.

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Trey Garrison was a Senior Financial Reporter for HousingWire.com. Trey served as real estate editor for the Dallas Business Journal, and was one of the founding editors of D CEO Magazine. He has been an editor for D Magazine — considered among the best city magazines in the United States — and a contributor for Reason magazine.

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